New Markets, New Demand

It was hard to miss America’s bumper crop of corn from my train window this summer.

My family and I were on Amtrak’s Empire Builder, headed northwest. The rows of corn were still pretty immature (we’re talking early June), but the deep healthy green of the plants was plain to see — even for a non-farming, Florida-dwelling, know-nothing Easterner like myself — as we rolled through Minnesota and North Dakota.

Six months later, and it’s likely that when the USDA adds up all its numbers, America’s corn harvest could be one of the biggest on record (again). No wonder corn prices are at five-year lows (not to mention the share prices of major agribusiness companies, and other commodity prices). Is there any room for relief?

Yes, in the form of China and India’s terribly smoggy air pollution problems…

In Beijing, they’re wrapping up what’s likely the worst year ever for air pollution, despite the downshift in the country’s industrialized economy. The situation became so bad this month that Chinese authorities declared a first-ever “red alert,” limiting auto traffic and closing factories.

Smog is a major problem in India too. It’s getting even worse as Indians discover a love for cars (like the Chinese and we Americans before them). Cities such as Mumbai are in the midst of major artery-building projects to reduce traffic congestion, which — surprise, surprise — make it more attractive for a growing number of Indians to drive instead. Automakers there say car sales rose again last month at double-digit levels, for a record 13th month in a row.

New Markets, New Demand Affect Commodity Prices

How to reduce the smog problem? Increasingly, emerging markets are turning to ethanol-blended gasoline, which results in lower tailpipe emissions of carbon gases and soot.

Most recently, U.S. ethanol exports jumped 16% on a month-to-month basis, to more than 70 million gallons. The U.S. Renewable Fuels Association said China, for the first time ever, was America’s top international customer for monthly ethanol sales, and nearly double the volume of China’s purchases two years ago.

And no wonder. In 2014, six of China’s 34 provinces required ethanol-blended gasoline. Reuters recently reported that 11 provinces now require ethanol blending. Expect more of China’s powerful provincial governments to join, pushed by public outrage and long-term health worries.

India is starting to get on board too. Earlier this year India’s government required a 5% blend of ethanol with gasoline (to be eventually bumped up to 10%). But there isn’t enough homegrown ethanol to meet the mandate (growers of sugarcane, the main source of ethanol feedstock in India, earn more money selling to liquor makers).

So exports of U.S. ethanol fuel to India are quickstepping higher.

According to U.S. Energy Information Agency data, American ethanol makers exported just 5,000 barrels of the stuff to India in 2012, then nearly 400,000 barrels a year later and almost 1 million barrels in 2014. As of the latest data (September), ethanol exports are another 16% higher. In the U.S., ethanol producers are running full-out to meet demand, setting a new production record of 1 million barrels a day in November.

An End to the Commodity Bear Market?

So here’s the big question: Are rising ethanol exports enough to turn around corn prices (and the depressed shares of food-processing companies that benefit from those higher prices)?

On its own, without help from a declining dollar, the answer is “no.” When oil prices are low (and the dollar strong), U.S. consumers don’t care as much about saving a few dollars buying ethanol-blended gasoline.

Then again, what happens when new information disrupts a long-held set of expectations (like the dollar will always be strong, or that bumper crops of corn are the “norm” or that ethanol consumption is largely limited to the U.S., the European Union and Brazil)?

There’s also the example set by corn prices between 2006 and 2012, when rising ethanol production pulled away a big chunk of the U.S. corn crop, otherwise destined for food consumption. The impact, according to one study, added 34% to corn prices during the period.

Perhaps the most interesting indicator is corn prices right now; they’re unchanged since November, despite oil prices down by 25% over the same period. To me that indicates that sellers of these and other grains are all but exhausted, run down by the inexorable march higher of the U.S. dollar.